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Want To See A Real Stock Market Bubble? at Trader’s Narrative

You know, I’m tired of people calling the US market a “bubble” or using words like “melt-up” or “buying panic” to describe it. These sort of pessimistic adjectives belies the bearish sentiment still pervasive in the wider market. If you want to see a real bubble in the making right now, you needn’t look far: China.

The Shanghai Composite has been on a rampage. Since bottoming in the summer of 2005 it has risen ~300%. Just recently, it hit a bump earlier this year and since bottoming in early February 2007 it has risen 50% (and counting). No matter how you look at it, China has gone parabolic.

The US large caps, which are currently leading the market, have put in a tame performance by comparison. They’ve only returned about a tenth of what the Chinese markets have. Still want to call it a bubble?

Keep in mind that I’m comparing the Shanghai Composite to the Dow and not the Shenzhen. That would make the comparison even more ridiculous since it has risen ~70% since its February 2007 bottom. By the way, this short term “speed bump” in the Chinese markets gave the world markets quite a jitter, if you recall.

Click to enlarge graph:
shanghai composite compared to dow jones 2006 - 2007.png

I’m not concerned about the US markets. But I am rather very concerned about what the Chinese bubble could mean for them. Technically speaking, the Shanghai market could fall 1000 points or about 25% and still be in a long term uptrend. How do you think the world markets would react to such a drop? what if it comes in a very short time?

The other reason I’m concerned is that the Chinese market, unlike the US markets or any of the other well established global financial markets, are riding on fumes. There is no substance behind the companies. Most of them are shells. The banks are in terrible shape. And most of the demand is internal with Chinese funnelling millions of Yuan towards a thinly veiled form of gambling.

When the Chinese bubble ends in tears (and it will… they all do) the Chinese market’s correction back to reality will effect the US markets more than anything stateside. This is something most people, both permabulls and permabears, are not yet cognizant of.

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10 Responses to “Want To See A Real Stock Market Bubble?”  

  1. 1 Tom

    TN: Yup, this will end in tears alright but probably not before the 2008 Olympics. The government won’t let a stock market crash interfere with their Olympic glory. At least that’s my cynical outlook!

  2. 2 Babak

    Tom, yup. I agree that’s their goal. But the markets have a funny way of following their own script.

  3. 3 shelley

    Hello, I dont know anything about stocks, but I have felt the same thing, I cant imagine the Chinese not holding on to the status quo until after the olympics, then all hell will break loose.

  4. 4 Babak

    the Chinese are masters of manipulation yet when everyone thinks something is bound to happen a certain way, it has a funny way of not happening that way.

  5. 5 Wealth Building Lessons

    i agree, i wouldn’t be a buyer of Chinese securities at this price.

    i’m not sure when it’ll correct but eventually it will. trees don’t grow to the skies.
    no, wait. they do….oh no this is 2007 not 1999, they don’t anymore!!!!

  6. 6 Babak

    WBL, with the newly instituted tweaks the Chinese govt gave this bubble an extended life. Still think it’ll end in tears.

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